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The financial world’s question to itself: Are there too many internal regulators? | Financial News
How many self-regulatory organizations (SROs) are too many? Last week, the Reserve Bank of India (RBI) limited the number of such entities for non-banking financial companies (NBFCs) to “a maximum of two”. And to ensure that smaller NBFCs have a fair voice, it said that an SRO should have at least 10 percent of those in the “base tier” as per the scale-based regulatory framework. In one fell swoop, Mint Road put to rest concerns of a proliferation of SROs among NBFCs, given the many types of entities at play here: from those working in housing finance to large deposit-taking companies.
Should this approach be extended to SROs in other parts of the financial world?
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Since the ‘Omnibus Framework for Recognition of SROs for RBI Regulated Entities’ was presented for public comments on March 21, a number of industry associations have expressed interest in becoming SROs.
In fintech, you have the Fintech Association for Consumer Empowerment and the Digital Lenders Association of India. Then you have the Small Finance Banks Association of India, the Money Cycle Association (a body within the cash logistics vertical). The business correspondent sector and the National Urban Cooperative Finance and Development Corporation (the umbrella body for urban cooperative banks) could also be in the fray. If each of these sectors has an SRO, that will create five new ones. Add to that two existing SROs in microfinance – Network of Microfinance Institutions and Sa-Dhan – and you have seven.
Where is SRO going as an idea?
“I think the SRO structure should have been better thought out. If you have multiple SROs, coordination becomes an issue, especially in the case of financial conglomerates. There must also be a Chinese wall between a commercial or business body and the SRO. Otherwise, it becomes a lobby group,” says M Damodaran, chairman of Excellence Enablers and former chairman of the Securities and Exchange Board of India.
Now that the RBI has capped the number of SROs in the NBFC space to two, there are rumours that this may apply to fintech as well. The problem here is that it is even more of a rainbow compared to legacy NBFCs. The RBI’s position is that SRO-FT (fintech) should gain traction with its membership.
It gets more interesting when you consider the fact that legacy banks and NBFCs are going digital. Another intersection between fintech, banks and NBFCs is co-lending. The issue: It’s difficult to put businesses into organized silos.
Business Standard has learned from reliable sources that fintechs have informally raised the issue of number of SRO-FTs with the banking regulator.
“A good way would have been to have a task force and let them decide how to slice and dice,” says Naveen Surya, former president of the Fintech Convergence Council.
What if the SRO route were to be emulated by other financial regulators: the Pension Fund Regulatory and Development Authority or the Insurance Regulatory and Development Authority of India? The sectoral pressures and strains will only increase. Will we then have the equivalent of the Financial Stability and Development Board – chaired by the Finance Minister for coordination among financial regulators – for SROs as well?
Another sensitive point is the resolution of disputes between two SROs?
“If there is a difference of opinion between two SROs working in the same sector, the regulator will have a final opinion on the same. Fortunately, we have not had any similar situation in our area between the two SROs,” says Jiji Mammen, executive director and CEO of Sa-Dhan. Again, in its circular on SRO-FT(s), the RBI highlighted that members should consider it “as a legitimate arbiter of disputes”. This would require a transparent and fair resolution mechanism for disputes that arise between members. By dealing with member conflicts and disputes, the SRO-FT should contribute to a stable and harmonious fintech environment. It is unclear how this will happen.
Ask Mammen about the experience among microfinance institutions, and he will tell you that Sa-Dhan points out irregularities or shortcomings in the sector to member institutions through recommendations that they are required to follow. But here’s the operational part: While the SRO committee can recommend minor penalties, “we generally escalate the matter to the regulator for any action on any non-compliance. The SRO is more of a friend, philosopher and guide than a ruthless enforcer.”
SRO territory is about to get interesting.